Finance Minister Tito Mboweni will be in the spotlight Wednesday when he delivers his maiden budget speech.
Marc Sevitz, co-founder of TaxTim, a chartered accountant and tax practitioner, says he does not expect the budget to have many surprises or controversial elements this year due to the multiple changes made to the finance ministry over the last twelve months as well as the upcoming elections in May.
“Instead of introducing any significant tax hikes, we believe that further reductions or capping in government expenditure is essential to curb the budget deficit. There are however, some subtle ways that Treasury can generate some additional revenue from taxpayers, without causing too much alarm,” he said.
TaxTim looks at some of the options available to the finance minister.
Considering that Treasury took the bold step to raise VAT from 14% to 15% in 2018, Sevitz said it can be safely assumed that there will be no further adjustments to the VAT rate this year. This is in spite of the fact that the VAT rate of 15% is still relatively low by international standards.
“We are actually hoping for the Minister to announce some more zero-rated items to offset some of the harsher effects of the prior year increase,” Sevitz said.
Capital Gains Tax (CGT)
CGT inclusion rates were increased in 2016 from 33.3% to 40% for individuals and from 66.6% to 80% for companies and trusts.
There has been no adjustment to this inclusion rate since 2016, however the introduction of the 45% tax bracket in 2017 for individuals had the effect of increasing the maximum effective CGT rate from 16.4% to 18%, Sevitz said.
“Investors breathed a sigh of relief last year, when no changes were made. However, once again this tax, which predominantly affects the wealthy, is under scrutiny. There is the possibility that National Treasury could look to raise the CGT inclusion rate for individuals from 40% to 50% which some predict would generate approximately R2.5 billion.
“However, there is the risk that this would discourage investment, which may be more damaging in the long run and not worth the relatively insignificant revenue that this adjustment may raise,” Sevitz said.
The corporate tax rate is currently 28% in South Africa and most analysts do not predict an increase, said Sevitz.
“In fact, there have been calls to reduce the corporate rate to stimulate growth and improve economic competitiveness. We believe an increase would deter foreign investment and hinder economic growth which South Africa can ill afford, while a decrease, seems like too much of a gamble.
“It seems likely therefore, that the rate of 28% is set to stay a while longer.”
Personal Income Tax
It is estimated that there are only about 7 million taxpayers in South Africa out of a population of 56 million people (i.e. 13%). This relatively small tax base already faces high tax rates, with limited benefits received, TaxTim said.
The super wealthy – those earning more than R1.5 million per year – were hit in 2017 with the new 45% bracket. South African tax residents working overseas will be targeted next when their income above R1 million will be taxed from 1 March 2020. “Applying even more pressure to this small tax base could increase emigration rates and cause a potential slippage in tax compliance, which is already a concern,” said Sevitz.
“In the light of the above, we don’t foresee any major increase in personal income tax rates.
“There will of course, be the usual adjustment in the tax brackets for inflation – so, as you earn more, the tax rates are adjusted accordingly so that you are not poorer than you were last year. However, we think Treasury might sneak in some additional revenue here by implementing a less than inflationary adjustment to the tax brackets.”
Medical Schemes Tax Credit
Medical scheme members currently receive a medical tax credit of R310 per month for the first two beneficiaries and R209 per month for the remaining medical scheme members, TaxTim pointed out.
Unlike an expense deduction, which reduces taxable income, the medical credit is a direct deduction against the taxpayer’s actual tax liability and therefore is a set amount, which is not dependent upon the taxpayer’s income level, it said.
Treasury have been hinting for a while that they are considering the reduction of the medical tax credit to fund the National Health Insurance (NHI). This is another controversial area – eliminating this credit entirely will upset many people who are dependent on it in order to access private medical care, said Sevitz.
They are essentially being compensated for not accessing the government health service. The government health system can’t cover everybody and therefore it relies on people seeking alternative (expensive) private health care and therefore should incentivise taxpayers accordingly, he said.
“We think the medical credit is here to stay (for 2019/2020 at least), but it seems likely that it won’t be adjusted fully for inflation. Similar to when Treasury stopped increasing the interest rate exemptions, these could just remain the same until inflation catches up.
“We do believe however, the end of the medical tax credits is on the horizon,” Sevitz said.
Fuel and Road Accident Fund (RAF) Levies
Although there is need to increase fiscal revenue at the moment, Treasury is most likely to look for revenue in other ways, especially after the very large fuel levy increase we saw last year, TaxTim said.
Large increases in the fuel levy could have inflationary effects and of course increase transports costs. “This is not an ideal scenario as government works hard to stabilise the economy and reverse some of the economic malaise we have had in the last few years,” said Sevitz.
Tax specialist PwC, noted that the general fuel levy has been increased significantly in each of the four previous budgets as a means of raising additional tax revenues.
The general fuel levy is only slightly progressive and was previously seen as being less politically sensitive than VAT. This perception has, however, changed with the increased attention resulting from the VAT increase in 2018, it said.
“As such, it may no longer be seen as a viable option for government to raise additional revenues. Increases are therefore likely to be limited to inflation. We therefore expect the general fuel levy to be increased by between 15c/l and 20c/l,” PwC said.
In the 2018 MTBPS, it was stated that the liability of the Road Accident Fund (RAF) is expected to grow to R393 billion by 2021/2022 from R206 billion at the time of the MTBPS, and that the RAF would require further large increases to the fuel levy in each of the following three years.
“We anticipate an increase of at least 30c/l in the RAF levy, in line with the increase in the 2018 budget,” PwC said.